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Home Equity Loan vs. HELOC: What’s the Difference?

The finance industry continually works for you and the economy. However, the finance terms sound confusing to understand and derive the benefits from the services. Some financial institutions talk about interest rates, collateral, and other things, while mortgage brokers ask for a high credit score, income proof, and other documents. When you now need a loan, the financial institutions or entities are asking for collateral. Therefore, the distinction between HELOC and home equity loans comes into play. 

 

Selling a house for profits can imply a windfall. While tenants or family members occupy your place, your property gain is fixed unless you procure a Home equity loan or HELOC (Home Equity Line of Credit). In this manner, your home equity will be the market value minus your loan amount. Hence, it would help if you calculated the cons and pros of HELOC and home equity loans to make the best decision.

Home Equity Loan:

Many banks or financial institutions possess a gamut of home equity loans for your needs. They charge a fixed rate of interest; meanwhile, you pay the same amount every month until the loan is recovered. You can also procure a home equity loan with other mortgage payments, depending on your income level. Now let’s check the drawbacks and benefits of a home equity loan for your financial needs:

  • Pros:
    • Interest Rate: It is fixed from loan amount reflection in your bank account to the final loan recovery.
    • Payments: You need to pay a certain sum of money every month until the loan tenure is over.
  • Cons:
  • Financial Baggage: A home equity loan can backfire against you if your house’s market value decreases. It is a significant and unpredictable financial baggage on your shoulders.

HELOC (Home Equity Line of Credit):

HELOC works like a credit card in which you will be given credit money as home equity. You can take whatever amount you need from your HELOC account and repay it whenever you can. However, you will always need to pay the interest on your loaned money until the full-payment is recovered. 

 

HELOC’s interest rate is not fixed as home equity loans. It changes according to the finance market. In this manner, you will pay a variable interest rate on your credit money from the HELOC account. Sometimes you may have to pay a high-interest rate and vice versa. Nonetheless, you can contact your HELOC provider and get a fixed interest rate on the money you owe. You can later pay the variable interest rate as per usual. 

Let’s weigh down the cons and pros of HELOC (Home Equity Line of Credit):

  • Pros: 
  • Compound Interest: You solely pay interest on the money you took from your HELOC’s approved loan amount.
  • Flexibility: You can get interest payment flexibility during the draw period.
  • Cons: 
  • Interest Rate: After procuring HELOC, you are liable to pay the variable interest rate as set by the finance market.
  • Indiscipline: HELOC works as credit cards, implying you can overuse the limit and get financial burden in a short time. Eventually, you will be left with enormous interest and principal payments amid the repayment process.

Conclusion:

Before selecting a home equity loan or HELOC plan, it will help if you consider the loan amount you need and its purposes! Besides, you have to procure essential information on tax advantages, monthly payments, processing fees, and interest rates to weigh down your home equity options. It is a compelling financial benefit of getting equity for your property. Now carefully understand the difference between HELOC and home equity loans alongside the pros and cons!